Insurance: Imputed & Constructive Knowledge; Promissory Estoppel; Coverage; Detrimental Reliance
Trial Lawyers Association of British Columbia v. Royal & Sun Alliance Insurance Company of Canada, 2019 ONCA 800, 2021 SCC 47 (38949)
"D died in a motorcycle accident. His insurer, Royal & Sun Alliance (“RSA”), proceeded to defend his estate in two lawsuits started by B and another claimant, both injured in the accident. Three years after the accident, and over a year into litigation, RSA learned that D had consumed alcohol immediately prior to the accident, putting him in breach of his insurance policy. RSA promptly ceased defending D’s estate and denied coverage. Nearly three years later, the other claimant’s action proceeded to trial, resulting in a judgment against D’s estate and against B, and a judgment for B on his cross‑claim against D’s estate. B sought a declaration of entitlement to recover judgment against RSA on the basis that RSA waived D’s breach or was estopped from denying coverage to D’s estate. The trial judge granted the declaration and found that RSA had waived its right to deny full coverage by failing to take an off‑coverage position and by providing a defence to D’s estate as the litigation progressed. Having found waiver by conduct, the trial judge did not consider the estoppel argument. The Court of Appeal allowed RSA’s appeal, holding that, at that time, Ontario’s Insurance Act precluded recognition of waiver by conduct and with respect to estoppel, that RSA’s conduct could not amount to a promise or assurance which was intended to affect the parties’ legal relationship, as RSA lacked knowledge of D’s policy breach when it provided him with a defence. B sought to appeal the decision, but after being granted leave, he reached a settlement agreement with RSA and discontinued his appeal. Trial Lawyers Association of British Columbia asked and was permitted to be substituted as the appellant."
The SCC (7:0) dismissed the appeal.
Justices Moldaver and Brown wrote as follows (at paras. 3-4, 30-38, 41-51):
"...The appellant now concedes, correctly in our view, that waiver by conduct was precluded by statute at the relevant time. With respect to promissory estoppel, we agree with the Court of Appeal that RSA could not have intended to alter its legal relationship with Mr. Bradfield because it lacked knowledge of the facts which demonstrated (or otherwise put RSA on notice) of Mr. Devecseri’s policy breach. Nonetheless, even if this obstacle could be overcome, we would still harbour serious reservations about the availability of any estoppel argument on the facts of this case. A third‑party claimant like Mr. Bradfield faces additional hurdles in establishing a successful estoppel argument against an insurer, given the nature of their statutory relationship. Whether and to what extent Ontario’s Insurance Act, R.S.O. 1990, c. I.8, permits third parties like Mr. Bradfield to assert estoppel arguments, including on behalf of a first‑party insured, raises a number of issues that were not fully or satisfactorily argued but which warrant comment.
A preliminary issue also arises. Mr. Bradfield discontinued his appeal after this Court granted leave to appeal because he and RSA reached a settlement agreement. This Court then granted the request of the Trial Lawyers Association of British Columbia to be substituted as the appellant. Although the appeal is moot, Trial Lawyers argues that we ought to exercise our discretion to hear it on the merits in accordance with Borowski v. Canada (Attorney General),  1 S.C.R. 342. We agree.
In sum, where an insurer is shown to be in possession of the facts demonstrating a breach, an inference may be drawn that the insurer, by its conduct, intended to alter its legal relationship with the insured ⸺ notwithstanding the fact that the insurer did not realize the legal significance of the facts or otherwise failed to appreciate the terms of its policy with the insured.
Here, it is undisputed that, when RSA defended Mr. Devecseri’s estate, it did not know of the fact of his consumption of alcohol prior to the accident, which fact, if known, would have demonstrated his policy breach. This is not a case where RSA knew of Mr. Devecseri’s consumption of alcohol but failed to appreciate it as putting him in breach. On that basis, Parrott, Rosenblood Estate and Campbell are readily distinguishable. Knowledge of the facts demonstrating Mr. Devecseri’s breach cannot be imputed to RSA, and RSA therefore cannot be taken to have intended to assure his estate, or Mr. Bradfield, or anyone else, that it would not be relying upon that breach to deny coverage.
Trial Lawyers urges us to find that RSA constructively knew of Mr. Devecseri’s breach, and is thus taken to know what it ought to or should have known. This submission is premised on what Trial Lawyers says is RSA’s breach of a duty to diligently investigate the claim against its insured. We would reject Trial Lawyers’ argument, and with it the possibility of recognizing constructive knowledge arising from a breach of a duty to investigate as grounding promissory estoppel, for two reasons.
First, this argument entails a significant — and, in our view, unwise and unnecessary — modification of the obligation an insurer owes to the insured in the context of a liability claim. This duty exists because insurers have strong economic incentives to deny coverage, which this Court has sought to moderate in the public interest. As claims arise under a policy of liability insurance, insurers are bound by a duty to the insured to investigate each claim “fairly”, in a “balanced and reasonable manner”, and not engage in a relentless search for a policy breach (Fidler, at para. 63, citing 702535 Ontario Inc., at para. 29). The point bears reiteration: this Court has sought to temper the incentives of insurers in order to protect the interests of insureds, who are vulnerable when insurers act with “wilful tunnel vision” to look for policy breaches where there is “nothing to go on” (Whiten v. Pilot Insurance Co., 2002 SCC 18,  1 S.C.R. 595, at paras. 102‑3).
The duty owed to the insured to investigate fairly, in a balanced and reasonable manner, as recognized by this Court is at odds with the duty to investigate “thoroughly” and “diligently” urged upon us by Trial Lawyers (A.F., at paras. 121 and 123). Apparently relying on Coronation Insurance Co. v. Taku Air Transport Ltd.,  3 S.C.R. 622, Trial Lawyers submits that the insurer is bound by a duty to “know the things that were within [its] grasp” (transcript, p. 24; see also A.F., at para. 124; Coronation Insurance, at p. 640). But Coronation Insurance is of minimal assistance here. First, the standard set in that case and in Canadian Indemnity Co. v. Canadian Johns‑Manville Co.,  2 S.C.R. 549, related to insurers’ presumed knowledge of their own files and of issues of public notoriety. The coroner’s report at issue in this case was neither in the possession of the insurer nor notorious. More fundamentally, those cases concerned an insurer’s assessment of the risks associated with a prospective insured before even entering into an insurance contract. At that pre‑contract stage, this Court’s concern was to temper the insurer’s incentives to enter into a contract while turning a blind eye to the risks posed by the insured, only to then use the non‑disclosure of those risks as a basis for denying coverage as claims arose. The incentives operate differently where, as here, we are concerned with claims under an existing contract. At that stage, the insurer has every incentive to search for breaches in relation to a given claim. We fear that, far from tempering these incentives, Trial Lawyers’ submission would augment them, pushing insurers to go the extra mile to find policy breaches. For this reason, the submission must be rejected.
Secondly, there is no basis in law for a third‑party claimant such as Mr. Bradfield to be able to ground an estoppel argument in any alleged breaches of an insurer’s duty to its insured. In other words, the duty to investigate fairly, in a balanced and reasonable manner, is owed only to the insured, not third parties. Were such a duty owed to third parties, it would sit uneasily, and indeed would undermine, the duties of utmost good faith and fair dealing that govern the relationship between the parties to an insurance contract — in this case, between RSA and Mr. Devecseri. This is because the obligations between the insurer and the insured are reciprocal; while the insurer has the aforementioned duty to investigate fairly, in a balanced and reasonable manner, the insured is also under a reciprocal duty to disclose facts material to the claim (Whiten, at para. 83, citing Andrusiw v. Aetna Life Insurance Co. of Canada (2001), 289 A.R. 1 (Q.B.), at paras. 84‑85; Bhasin v. Hrynew, 2014 SCC 71,  3 S.C.R. 494, at para. 55).
This reciprocity of obligation is worth stressing. This Court has taken care to strike a careful balance in stating and developing the duty of utmost good faith and fair dealing between insurer and insured with a view to facilitating the honest, fair, and expeditious resolution of insurance claims. Here, RSA owed Mr. Devecseri a duty to investigate the claims against his estate fairly, in a balanced and reasonable manner, and without being zealous or relentless in its search for policy breaches. Had he survived, Mr. Devecseri would have owed a reciprocal duty to disclose any information in his possession which might have voided his coverage — in particular, that he had consumed alcohol. If, after having received this disclosure, RSA had continued to provide a defence, Mr. Devecseri could have relied on that continued defence as an assurance of coverage that could prevent RSA from later changing positions. Had, however, Mr. Devecseri failed to disclose to RSA the fact of his having consumed alcohol, the breach of his duty to disclose would foreclose any later assertion by him and against RSA of estoppel.
Trial Lawyers asks that we allow third‑party claimants to piggy‑back onto the relationship between insurer and insured, characterized as it is by mutual duties of utmost good faith and fair dealing, but in a way that strips the new relationship between an insurer and third‑party claimants of all such mutuality. So, while Mr. Bradfield claims he does not recall whether Mr. Devecseri consumed alcohol, it is worth bearing in mind that, had he known, he would be under no obligation to RSA to disclose that fact. And yet, Trial Lawyers would have this Court burden RSA with a duty to Mr. Bradfield to discover that selfsame fact. We see no justice in impressing RSA with such a duty while Mr. Bradfield owes no corresponding obligation. Further, and in any event, we note that promissory estoppel requires that the party seeking the aid of equity come with clean hands, which may also entail an obligation to disclose material facts, particularly in contexts such as insurance where parties are bound by reciprocal duties of utmost good faith (see, e.g., MacDougall, at §§ 5.289 to 5.292).
Viewed in light of the reciprocity of obligations between the actual contracting parties — the insurer and the insured — there is a certain absurdity to Trial Lawyers’ position. It would effectively mean that a contract of liability insurance provides greater protection to, and imposes fewer (indeed, no) obligations upon, third parties like Mr. Bradfield than it provides to and imposes upon the first‑party insured. This result effectively runs contrary to the clear expression of legislative intent in s. 258(11) of the Insurance Act, which provides that an insurer is entitled to assert any defences against the claimant as it could raise against the insured.
Promissory estoppel generally requires that the promisor and promisee already have a legal relationship (Maracle, at p. 57; Canadian Superior Oil Ltd. v. Paddon-Hughes Development Co.,  S.C.R. 932, at p. 938; Atlantic Steel Buildings Ltd. v. Cayman Group Ltd. (1982), 50 N.S.R. (2d) 609 (S.C. (App. Div.)); see also MacDougall, at § 5.92). Trial Lawyers says that Mr. Bradfield, as a third‑party claimant relative to Mr. Devecseri’s insurance policy, was in a legal relationship with RSA by virtue of s. 258 of the Insurance Act. The relevant provisions of s. 258 of the Insurance Act read as follows:
- Application of insurance money, 3rd party claims, etc.
258 (1) Any person who has a claim against an insured for which indemnity is provided by a contract evidenced by a motor vehicle liability policy, even if such person is not a party to the contract, may, upon recovering a judgment therefor in any province or territory of Canada against the insured, have the insurance money payable under the contract applied in or towards satisfaction of the person’s judgment and of any other judgments or claims against the insured covered by the contract and may, on the person’s own behalf and on behalf of all persons having such judgments or claims, maintain an action against the insurer to have the insurance money so applied.
- Defence where excess limits
(11) Where one or more contracts provide for coverage in excess of the limits mentioned in section 251 [i.e. the $200,000 mandatory insurance minimum], . . . the insurer may,
(a) with respect to the coverage in excess of those limits; and
(b) as against a claimant,
avail itself of any defence that it is entitled to set up against the insured . . . .
Trial Lawyers submits that this statutory language creates the requisite legal relationship allowing Mr. Bradfield to assert a right of coverage as against RSA, both on his own behalf and by “stand[ing] in the shoes” of Mr. Devecseri’s estate (A.F., at para. 102). We agree that s. 258 creates a legal relationship between Mr. Bradfield and RSA. It grants third‑party claimants under an insurance policy a cause of action directly against an insurer, thereby bypassing the insured. In this way, and to that extent, it ousts the common law rule of contractual privity which would otherwise bar a third‑party claimant from suing an insurer on an insurance contract to which the claimant is not a party. Absent s. 258, the third‑party claimant’s ability to recover funds from an insurer would be “entirely dependent upon the extent to which the insured [here, Mr. Devecseri’s estate] chooses to or is able to enforce its contractual rights against the insurer [here, RSA]” (B. Billingsley, General Principles of Canadian Insurance Law (3rd ed. 2020), at p. 295). All other provinces and territories have enacted provisions similar in effect to s. 258.
We are, however, far from persuaded that Trial Lawyers accounts correctly for the nature of this relationship or of the rights and responsibilities flowing therefrom, and their implications for the estoppel analysis. This is because the precise nature of this legal relationship, as determined by the statutory text, permits a claimant to sue the insurer only “upon recovering a judgment” against the insured. On the facts of this case, this restriction is significant because RSA abandoned its defence of Mr. Devecseri in 2009, three years before Mr. Bradfield obtained his cross‑claim judgment against RSA. This is the first obvious difficulty with Trial Lawyers’ position: it relies on conduct by RSA that predates the existence of the relevant legal relationship.
The difficulties do not end there. It is unclear to us, based on the text of the statute, whether Mr. Bradfield can assert an estoppel argument on behalf of Mr. Devecseri’s estate, as Trial Lawyers proposes. Section 258(1) permits Mr. Bradfield to bring his claim only on his “own behalf and on behalf of all persons having such judgments or claims . . . against the insured”, which would appear to foreclose claims in which Mr. Bradfield “steps into the shoes” of Mr. Devecseri’s estate and asserts an estoppel on that basis. We note, on the other hand, that s. 258(1) states that it applies to judgments against the insured that are “covered by the contract”, which language contemplates a judicial determination of whether the first‑party insured is, indeed, “covered”, in the sense that the insured could estop the insurer from denying coverage.
Accordingly, without fuller submissions than we received, we would refrain from definitively concluding whether s. 258(1) allows the type of claim that Mr. Bradfield advanced. But we nevertheless emphasize that these questions require clear answers before a claim like Mr. Bradfield’s could succeed.
Even accepting for the purposes of argument that s. 258 operates as Trial Lawyers suggests — by permitting Mr. Bradfield to assert estoppel based on RSA’s conduct predating the cross‑claim judgment, whether on his own behalf or on behalf of Mr. Devecseri — there are further difficulties to resolve. We are of the view that Trial Lawyers has not identified any conduct by RSA that could amount to a “clear and unequivocal” or “unambiguous” assurance that it would refrain from denying coverage based on a later‑revealed policy breach (Engineered Homes Ltd. v. Mason,  1 S.C.R. 641, at pp. 646‑47, citing Halsbury’s Laws of England (4th ed.), vol. 16, at para. 1514).
Trial Lawyers relies exclusively on RSA’s fulfilment of its various statutory obligations and its duty to defend as such an assurance. At the initial stages of the litigation, Ontario’s insurance legislation required RSA to advise plaintiffs of the existence of a policy covering Mr. Devecseri, the liability limits under that policy, and “whether the insurer will respond under the policy to the claim” (Insurance Act, s. 258.4). In answering the latter question, RSA had to determine whether its duty to defend Mr. Devecseri required it to respond under the policy. Importantly, RSA’s duty to defend Mr. Devecseri was triggered not by RSA being satisfied that Mr. Devecseri was not in breach, but simply by the receipt of a claim against the insured alleging facts which, “if proven to be true, would require the insurer to indemnify the insured for the claim” (Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, 2010 SCC 33,  2 S.C.R. 245, at para. 19; see also Monenco Ltd. v. Commonwealth Insurance Co., 2001 SCC 49,  2 S.C.R. 699, at para. 29; Non‑Marine Underwriters, Lloyd’s of London v. Scalera, 2000 SCC 24,  1 S.C.R. 551, at paras. 74‑78; Nichols v. American Home Assurance Co.,  1 S.C.R. 801, at pp. 810-11). Put simply, and absent a known policy breach, at the initial stages of a liability dispute the insurer may decline to defend the insured only where it is clear that the true nature of the facts as pleaded fall outside the scope of the policy (Scalera, at paras. 50‑55), or the claim is expressly excluded.
Where, therefore, an insurer responds to a claim against its insured by defending, it is communicating — to the insured and to the third‑party claimant — only that the claims against its insured are of a type that fall within the terms of coverage. In no sense can such a limited communication, without more, be taken as a promise to indemnify the claimant if the insured is found at fault, irrespective of any later‑revealed or later‑occurring policy breaches. Trial Lawyers, in short, seeks to imbue RSA’s provision of a defence to Mr. Devecseri’s estate with greater significance than RSA’s conduct in fact signified.
Lastly, even were it possible to construe the insurer’s assumption of a defence on behalf of its insured as a promise not to deny coverage, the third‑party context of this case raises yet more problems for Trial Lawyers. In cases of questionable coverage, insurers often rely on reservation‑of‑rights letters or non‑waiver agreements to preserve their right to deny coverage upon investigating the claim (see, generally, N. P. Kent, “Preventive Paperwork: Non‑Waiver Agreements, Reservation‑of‑Rights Letters and the Defence of Claims in Questionable Coverage Situations” (1995), 17 Advocates’ Q. 399). It is unclear to us how and whether a third party would ever obtain knowledge of a rights‑reserving instrument of this kind, and in the absence of such knowledge, the third party could conceivably argue an estoppel unavailable to the insured. In this way, Trial Lawyers’ submission once more appears to give more to the third party than to the first‑party insured.
The final hurdle for Trial Lawyers would lie in establishing detrimental reliance. While we need not decide whether detrimental reliance is made out on the facts of this case, we note that the parties advanced arguments on the extent to which detrimental reliance can be presumed in cases where litigation has progressed to an advanced stage (see Rosenblood Estate, at pp. 156-57). This Court has never opined on such a presumption of prejudice and we decline to do so here, but we nevertheless highlight that the cases upon which Trial Lawyers relies involved claims by the first‑party insured, not third‑party claimants. This distinction requires careful consideration in a future case.
We also affirm that detrimental reliance by the promisee must be shown to assert promissory estoppel. The Court in Maracle did not refer to the requirement of detrimental reliance because the detriment in that case was self‑evident: the promisor allegedly stated it would not act on an expired limitation period and the promisee then allowed the limitation period to expire before bringing an action. Detrimental reliance has, however, always been a requirement for asserting promissory estoppel, or for that matter any form of estoppel. This is because, being an equitable doctrine, its goal is to address unconscionable, unjust, or unfair conduct (Ryan, at paras. 68 and 74; Cowper‑Smith v. Morgan, 2017 SCC 61,  2 S.C.R. 754, at paras. 20 and 28). And what makes it unconscionable, unjust, or unfair to resile from a promise or assurance is that the promisor has, by intention and effect, induced the promisee to change its position in reliance thereon, to its detriment. For that reason, asserting promissory estoppel requires evidence of prejudice, inequity, unfairness or injustice before courts will give hold a promisor to its promise or assurance (see Hughes v. Metropolitan Railway Co. (1877), 2 App. Cas. 439 (H.L.), at p. 448, aff’d in Conwest Exploration Co. v. Letain,  S.C.R. 20, at pp. 27‑28, per Judson J.; Fort Frances, at p. 202, and Ryan, at para. 51, citing Amalgamated Investment & Property Co. (In Liquidation) v. Texas Commerce International Bank Ltd.,  1 Q.B. 84 (C.A.), at p. 122)."